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"A $1,000 donation from a donor in the highest tax bracket costs that donor only $604. The federal government kicks in the remaining $396 in the form of a reduction in taxes", writes Ray D. Madoff in a piece for the New York Times.

Similarly, Paul Vallely argues in an article for The Guardian, that, for a tax-deductible donation, "the highest-rate taxpayer would need to pay out only £55, because the state would provide the other £45", hence "taxpayers contribute part of the gift".

While I do understand, that the government loses money in tax incomes, I don't understand how this directly increases the tax burden on other tax payers (except for, in the long term, the government might raise taxes to make up for lost tax revenues).

Can anyone explain how this works?

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  • economics.stackexchange.com – Flux Sep 13 '20 at 3:04
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    I think your third paragraph describes how it works. – Simon B Sep 13 '20 at 16:22
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    Arguably, the charities are doing things that government would otherwise need to do (and more efficiently, in the main), thus the numbers are reversed: the government gets $1000 worth of welfare, museums, research, or whatever, yet spends only $396. – jamesqf Sep 13 '20 at 17:16
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    It does not directly, but ALL deductions, tax credits, not-taxable income, etc. reduces the total tax income. The remaining taxable income must be taxed at a given rate structure to bring in the desired tax income. – Programmer66 Sep 14 '20 at 19:39
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While I do understand, that the government loses money in tax incomes, I don't understand how this directly increases the tax burden on other tax payers (except for, in the long term, the government might raise taxes to make up for lost tax revenues).

It doesn't directly do anything in particular. If a charitable donation is tax-deductable, then the donor doesn't pay taxes on that money. They are not actually taking money from the government.

But it still leaves the government with less money to spend. The government has two options:-

  • Cut their spending for the year.
  • Raise the taxes on other people.

Whether this is good or bad depends hugely on your political opinions. Do you believe that:-

  • Governments are spending money on important things, and that the big philanthropists are taking money that could have gone to the government and are spending it on their own pet projects that don't help society as a whole.
  • Governments waste taxpayers money on things that people don't want, and that people should be allowed to keep back some of their income and spend it on charitable things that governments otherwise neglect.

To a large extent, that's the divide between left-wing and right-wing politics, or more precisely between socialism and libertarianism.

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Despite being about money and personal finance this is a political statement by the authors that ignores relevant facts. The most prevalent fact is that both countries mentioned deficit spend. Perhaps a more relevant question is why governments are over spending so much?

Also it displays an attitude, by the authors that is very harmful. Namely that the government has the first claim on someone's income. Why is that person being taxed so much?

Will these same authors bemoan the lack of charity in a different article?

It used to be that charity was encouraged and just about everyone (in the US) had the ability to contribute to charity and write it off on their income taxes. IMHO, this was a good thing. With changes to the tax law those deductions are gone except for a select few.

Sorry for the political nature of this answer, but the writings of these authors speaks for their desire for communist economic system in their countries.

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Saying it costs other taxpayers is a very simplistic analysis.

This would be true if: 1. The government absolutely MUST spend a certain amount of money. 2. If it doesn't receive this money from one person it must raise taxes on someone else to make up for it. And 3. The amount the government collects in taxes can be statically determined as gross national product times tax rate. That is, how much the government charges in taxes and what it does with the money has absolutely no effect on the economy.

But 1 and 3 are obviously false, which undermines 2.

If the government gives someone a tax deduction, they could make up for the lost revenue by spending less rather than increasing taxes on someone else. It is not at all obvious that there is some "right" amount of government spending, that the government should spend exactly $X and not a penny more or less.

The biggest chunk of government spending in western countries today is social programs. So if someone gives $1000 to help the poor, arguably that would mean that the government could spend $1000 less on helping the poor and the same amount of good would be accomplished. Suppose the tax deduction for that $1000 is, as in your example, $396. Then by giving giving a $396 tax deduction the "need" for government spending is reduced by $1000, so the government is really $604 ahead, and it should be able to cut taxes for other people. If you theorize that private charity is more efficient than bureaucratic government-run charity, the savings might be even greater.

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  • There is an assumption there that charitable spending equates to social good. Much of the Guardian article questions that. – Simon B Sep 15 '20 at 15:29
  • @Simon B: But there really is no objective way to measure whether charitable spending, or FTM government spending, actually produces "social good". – jamesqf Sep 15 '20 at 16:34
  • @SimonB If it's questionable whether private charity results in social good, it is surely even more questionable whether government welfare programs result in social good. For the analysis under discussion to be accurate, you'd have to assume that a homeless shelter run by Catholic nuns does no good for society, but government bureaucrats handing out free needles to coke addicts on the streets does amazing amounts of good. I haven't read the Guardian article, but that sounds wildly implausible to me. – Jay Sep 16 '20 at 2:13
  • @Jay But the definition of "charity" is really broad. If I pay for my old university to build a new library building (and thus get my name over the door) is that more socially beneficial than the government giving food stamps to the unemployed? That was essentially the argument of the Guardian article. It's worth bearing in mind that the Guardian is generally considered a more left-wing publication. – Simon B Sep 16 '20 at 17:03
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    @SimonB Well, maybe I'll actually read the article. If their thesis is that charitable deductions are permitted for some things that don't really benefit society, I think few would argue. The debate would be about the "some" -- how many and which ones? In your example, the government gives many billions to education, so I would think one could easily argue that a private donation to build a university library frees up an at least approximately equal amount of government spending that would otherwise have gone to build university libraries. But whatever. We probably shouldn't drift off ... – Jay Sep 16 '20 at 18:35
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There are many different possible aspects. Many donors profit off the donation and that in turn, like you said, lowers the amount of taxes to be used. In the US if it is a president you like and you like how they and the states allocate money (money for construction road development, etc, a donation can in a sense prevent that construction.

It is not exact, but a good example that covers multiple avenues is as follows: If made millions in income and I donate 1 million dollars (which that 1 million would have been taxed at 22%) to my own charity that I run (or any charity), I just avoided paying $220,000 to the government to fix roads, pay for military, etc. I can then also get a rebate on that, getting a small amount of money back from the government (now the government owes me).

In terms of allocation of money, many charities use donations to pay for salaries. Some take 50%, some may only take 1% of each donation for salary purposes. If the charity is a road building charity and they use a higher number (50%), now instead of 1 million going to pay contractors for road building, only $500,000 goes to paying contractors to build roads. And instead of paying to build roads in the areas that badly need road repair, they may only choose to pay for roads repairs in rich areas, but that would be a whole different discussion going any further than that.

Now if I was malicious like many high earning donors are, my money can be donated to my own charity. If it is my own charity, I can then take a salary off of that, or pay my brother a high wage to do paperwork so he can profit as well.

While this is of course not the situation with every donor or charity, this explains some issues and how it takes away money that the government could have used.

Two good videos that talk a little more about this and that likely have better info are: https://www.youtube.com/watch?v=KWNQuzkSqSM https://www.youtube.com/watch?v=k1vE_LVBx4s

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